USD/TRY Thesis: My most complicated yet least evidenced thesis

12:53 AM

****************WARNING: ADVANCED USERS OR OBSERVERS ONLY***************

I heard this possible trade on Real Vision TV on an interview by Michael Harris. My first response was to stay far away from this trade.

Reason? There are the three pillars that define what makes a discretionary macro trader. It is having an edge over 1) information 2) analytics or 3) execution.

If I do not have an advantage in these, I would not have an edge and will not trade.

My initial response to Turkey's issue was that it complex with too many variables. The last time Erdogan went to people, he got 51% of votes. This time he needs exactly 50% which is scary and too close to bet on.

But my recent reading has brought me into the realm of politics. I read a lot so it was luck that my initial view would have changed.

This is my longest post, so I had to cut down some details. But feel free to post on my wall or Twitter if there is something you would like to ask.

 Fundamentals - Part 1: Anatomy of a political player

Investors have been waiting on the sideline for Turkey. Long Term bulls in the country have been disappointed since the Arab Spring incident in 2010. The current state of emergency has not helped.
The recent referendum gives president Erdogan more power.

Any time power moves from the people to the elite few, I am against. Not just from a moral point of view, but is also the underlying basis of credit & business cycles.  So I bet against people who want try to keep power.

But this case may be different, instead, I am finding myself believing that Erdogan may win this. His reign has mixed results unemployment, rising to the highest level since 2010.

But GDP growth rate maintaining above 5% for a good part of his reign.

This screams to me that the Gini coefficient(income gap) must be widening, but there is no information as per World Bank(suspicious?).

Although I cannot confirm this, I am going to assume this is true. Countries suffering a large income gap will be unhappy. This set ups a move towards equalization.

Under the credit & business cycles, the next step is clear. It is usually war, recessions, or a political transference of power.

Here is where the script may not be the same. Erdogan has been using his power to increase his political power.

These factors that convince me to say this are:

 1) Poor/current/bad environment. The people want change.
Erdogan messaging to the people is "I will bring peace" and leaves out how his reign has done so far.

 2) Populism, one strong man who can make a change.
 Erdogan paints himself as the man to do this.

 3) "Us against them" rhetoric.
Recent Erdogan spats against Netherlands and Germany who he claims are "Nazis".

 4) Control of "good" image via media.
The takeover of Turkish media to appear like what Machiavelli calls "Virtuous", alike Putin. See recent movie called Reis

 5) Control of "bad" image.
Jailing of 144 journalists and seized control of more than 150 media companies.

 6) Shaming on making the wrong choice
He uses his influence on his supporters. He tells them "No" voters do not want peace.

 7) Religious bias.
He plays to be the Muslim hero despite the Turkish constitution being a secular state. This country is 99.8% Muslim

To keep this short and digestible I will leave the points at the above.


Fundamentals Part 2: How current investors are looking at it?
There may be mispricing because in reality there is a high amount of Media bias.

Erdogan is portrayed as a "bad guy". Focusing on what the Germany/Netherlands incidents and his dictatorship style.

The investment community probably thinks this at this very moment.

But the people interviewed to talk about these trends. Aren't they already outside of Turkey and do not represent the domestic Turkish community. Do we see the same effect of Putin outside of Russia?

There is also low coverage on the issue, most of the world not looking at Erdogan. Keyword searches on "Erdogan" show that few-ish searches have been done.

The last time there was a spike was during the last failed coup and the state of emergency. Remove Germany and Netherlands from recent searches due to spat, that number decreases.

Do investors understand what the domestic economy is thinking? I am not 100% sure. The USD/TRY is not even that well traded.

Michael Harris who was interview on real vision indicated many are short the Lire. Reasoning though but may not be correct in the long-run.

Fundamental Conclusion:
It is easy to pivot this against Russia. One can look at how high approval ratings can exist despite a poor performing economy.

Pivoting bias can ruin our trading.

It is in reading "The Prince" by Niccolò Machiavelli that I saw textbook tactics that Erdogan uses.

His play on the political environment has gained him much power and favour with the people. I can say with high probability he is going to be successful in this referendum.

Technical Analysis
I enjoy Macro trading because there are areas of mispricing. Especially if I assume price is wrong (ala George Soros).

Looking at the USD/TRY which is the only instrument I can use via eToro.

The cross looking back has been nothing but an upward move with no retracements or any other movement other than up to speak of. It is at a very extreme level.

Sentiment Analysis
The initial market reaction may be poor; most investors are outside of Turkey and think of him as a bad guy. 

XM the trading platform has increased margin on the USDTRY due to the expected volatility. Digital look is calling a higher cross if a "yes" vote is achieved. 

But it will likely turn when they realize or the event of the end of a state of emergency happens. One that has been holding the country back.

A stable President with much power, and a beat down economy with many many merits is very attractive.
The population over 80% literate. Many speaking English, French or German, this country's trade has much potential

Public investments in power plants, roads, and oil refineries will further improve prospects. The future looks good for the country.


If Erdogan gets the win, I will play this.

If he loses I will sit out.

If the wins follow a positive move in the market, I will take half a position and wait for retracement for next half.

If it moves negative, I will wait for a reversal pattern on the daily chart before entering a full position.

If EU possibility is (finally) taken off the table, market reaction may be bad for a long time. I will wait even longer.

Stop loss levels

This started with the Arab Spring in December 2010 and due to a series of political issues, we are here now. The resistance I see is at 3.80, 3.95 and physiologically a break of 4.10.

A good stop loss is the last high at 3.95 or the 4.10 level.

Take profit levels
A comparable country with Turkey GDP is Indonesia. While different in the investment nature of the two, it is a good proxy since both emerging economies.

It is easy to see how Turkey's Lire(TYR) has suffered since 2010. The Indonesian Rupiah (IDR) has depreciated against USD by about 35% to date. The TYR has depreciated more than 142%
Michael Harris believes that Erdogan will be pro-business. This I also believe is true, the GDP growth evidence of this.

The take-profit will have to be at a level where Turkey was actually stable. Before the coup, we are looking at 2.88 levels a 1:3 risk-reward. If one were to look at before Arab springs, this could be at the 1.42 levels with a 1:8 Risk-Reward.

Given our timeframe for this trade, the former would be a more sensible take-profit area for now but holding for a long period seem inevitable for this cross. Given the high amount of refund though, carry cost is low.

The only disadvantage is the short USD side of this, which is against my long term view. 

That aside though, relative value seems in favour of the Lire.

Conclusion - Cognitive dissonance
There is no doubt Erdogan is not as he paints himself.

He is the only president due to the term limit as a Prime Minister. He is running this referendum because he wants more power.  

He built a 1,150 room (no not a typo) palace for himself. This has no place in a country that is facing high unemployment and in political turmoil.

There are recordings of him asking someone to "hide the money".

The failed coup is clear signs that the country is unhappy and suspects him of not being honest.

He has taken away free speech by jailing journalist and shutting down media.

From a moral point of view, these are not ideals I wish upon anyone.  Yet I cannot deny that this may be growing pains of emerging countries.

·         Do I think this referendum is good for Turkey? No.
·         Do I think Erdogan will be able to settle the country down? Maybe
·         Is Turkey a place that has a potential to grow if politics can be settled? Yes.
·         Is this an attractive trade with good risk:reward metrics? Yes! Yes! And Yes!

Cognitive dissonance is when two parts of a person do not agree with each other. Here my moral and logical sides are at odds. But feelings aside I will invest may invest here.

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